Meaning
Legal tender refers to money recognised by law as a valid means of settling a monetary obligation.
In India, legal tender includes authorised:
- banknotes;
- one-rupee notes;
- coins;
- digital rupee issued by the Reserve Bank of India.
A creditor cannot ordinarily reject valid legal tender when it is offered in accordance with the law. However, legal-tender status does not mean that every person must accept unlimited quantities of coins or that every private transaction must necessarily be conducted in cash.
Banknotes
Under the Reserve Bank of India Act, 1934, every banknote issued by the Reserve Bank is legal tender throughout India for the amount stated on it, unless its legal-tender status is specifically withdrawn by the Central Government.
The Reserve Bank has the exclusive authority to issue banknotes, except the one-rupee note, which is issued by the Government of India.
Banknotes currently issued for regular circulation include denominations such as:
- ₹10
- ₹20
- ₹50
- ₹100
- ₹200
- ₹500
The ₹2,000 banknote has been withdrawn from active circulation but continues to remain legal tender. Withdrawal from circulation is therefore different from demonetisation.
The earlier ₹500 and ₹1,000 notes whose legal-tender status was withdrawn in November 2016 are no longer legal tender.
Coins and Payment Limits
Coins are issued by the Government of India under the Coinage Act, 2011 and are circulated through the Reserve Bank.
Their legal-tender character is subject to payment limits:
- coins of ₹1 and above are legal tender for payments up to ₹1,000;
- fifty-paise coins are legal tender for payments up to ₹10;
- coins below fifty paise are no longer issued for circulation.
The one-rupee note is treated as a coin for legal purposes because it is issued by the Government of India.
Coins of different designs within the same denomination remain valid legal tender unless officially withdrawn. A genuine ₹10 or ₹20 coin cannot be rejected merely because its design differs from another coin of the same denomination.
Digital Rupee
The digital rupee, also known as the central bank digital currency, is a digital form of the sovereign currency issued by the Reserve Bank of India.
It has the same legal-tender character as physical banknotes and can be used for digital payments.
It differs from:
- commercial bank deposits;
- mobile wallets;
- cryptocurrencies;
- privately issued digital tokens.
While bank deposits represent a liability of a commercial bank, the digital rupee is a direct liability of the Reserve Bank.
Legal Tender and Acceptance
Legal tender should be distinguished from a mandatory payment method.
Businesses may establish reasonable payment conditions, such as accepting only digital payments, provided these do not violate applicable consumer, contractual or regulatory requirements.
Legal-tender status mainly becomes important when settling an existing monetary debt. It establishes that the currency is legally recognised for payment.
Damaged, counterfeit or withdrawn notes do not automatically enjoy the same protection:
- counterfeit currency has no monetary value;
- excessively damaged notes may require examination or exchange;
- notes whose legal-tender status has been withdrawn cannot be used for ordinary transactions.
Conclusion
Legal tender in India consists of authorised banknotes, coins and the digital rupee. Banknotes generally have unlimited legal-tender status, while coins are subject to statutory payment limits. Legal-tender status can be withdrawn only through the procedure prescribed by law.
